I don't see any manipulation theory required to explain the AH drop to the $22 level followed by further descent to $20 at the close on Friday.
Clearly, pre-earnings, skeptics were in abundance concerning how AMD was going to absorb the new ATI debt burden without seriously impacting earnings going forward.
For me, I was comfortable, pre-earnings, that improving gross margins combined with very large Revshare gains tied to the Dell deal would more than absorb the $50M of added quarterly interest expense.
The significant gross margin hit in Q3 blew that scenario out of the pond leaving a void as to just how AMD is going to manage the ATI interest expense without impairing earnings going forward.
So, if one accepts the notion that AMD trades in the vicinity of 100 X quarterly eps, as was the case when AMD dropped from $42 to sub $20, then one shouldn't be too surprised with the AH activity on Wednesday, unless one believes that AMD's Q4 eps was somehow going to increase or at least remain flat despite Q3's gross margin reduction and the looming addition of $50M ATI debt expense.
So, in a nutshell, the $50M Q3 hit via gross margins, shook shareholder confidence in AMD's ability to smoothly absorb the 10% plus dilution and the additional $50M in debt interest, and the shaken shareholder did what shaken shareholders do.
On the positive side, perhaps AMD has now absorbed the "culture shock" in dealing with Dell, which probably explains the Q3 margin hit, and restored margins, as a result, combined with a nice bump in Revshare in Q4 stemming from the Dell arrangement and 65nm product will more than offset the additional dilution and additional debt load attributable to the ATI purchase.
For the conceptual investor, as opposed to the eps investor, a $10B valuation compared to the $125B INTC valuation makes no sense at all given AMD's 18.30% Revshare and now its own chipset division, and one can expect, assuming a positive impact from the Dell deal and successful ramping of 65nm that AMD will achieve a $20B to $40B valuation within the next year or two.
AMD needs to restore investor confidence with some "concrete" actions beginning tomorrow, if AMD is to hold at $20. |
